Since 2014, helping Ukraine prevail in Russia’s war has been a priority of Western governments and international organizations.
But what if some of the aid is going to one of its more dubious oligarchs instead of the country itself?
Oleksandr Kharchenko, the director of Ukraine’s Energy Industry Research Center, claims that that is just what’s happening in a provocative new opinion for the Atlantic Council’s UkraineAlert blog. Kharchenko alleges that $2 billion — including a World Bank loan and International Monetary Fund assistance to help provide natural gas to Ukraine’s vulnerable population — have not reached their intended targets.
Instead, they may have fallen into the pocket of oligarch Dmytro Firtash, currently under house arrest in Vienna and fighting extradition to the United States on corruption charges that he denies.
The reason is Firtash’s extensive network of political connections and his control of over 75 percent of regional gas distribution companies (known in Ukrainian as “oblgazes”).
Kharchenko says the logic of his accusation is simple: Ukrainian taxpayers pay into the state budget. The budget then pays out subsides using World Bank and IMF money intended to help fund gas purchases and subsidize gas for the country’s poorest residents. That money goes to the oblgazes. But thanks to recent regulatory changes, they never pay it onward to Naftogaz, the country’s state-owned gas company, which provides them with the gas they distribute.
“Where does this money go to? Nobody knows,” Kharchenko says. “It’s a private company without any public reporting.”
Kharchenko believes that Firtash and his associates have moved the money outside the country using opaque schemes. And they can get away with it through tacit connections to the Ukrainian government, which has largely put the brakes on energy sector reform.
In a statement provided to the Kyiv Post, a Group DF spokeswoman said that “Oleksandr Kharchenko’s column, published by the Atlantic Council, is so far from reality that commenting on separate, ridiculous statements simply makes no sense. The text is full of lies, insinuations, and slanderous statements. It is obvious that the column carries a profoundly paid-for character.”
Reform no more?
Ukraine’s gas market is divided into two segments: industrial and household. Natural gas for industrial usage represents roughly 55 percent of all consumption.
During the rule of President Viktor Yanukovych, Firtash took control of the majority of Ukraine’s oblgazes through a series of privatization auctions will little competition. All these regional firms were concentrated into Regional Gas Company, owned by Firtash and Opposition Bloc MPs Serhiy Lyovochkin and Ivan Fursin.
Today, thanks to reforms, industrial gas is now sold on a competitive market populated by gas traders from around the world. But household gas remains highly regulated by the government.
In 2015, the Verkhovna Rada passed a law that ostensibly tried to liberalize the country’s gas market. The new legislation attempted to break Firtash’s monopoly by mandating that the owners of gas transport and sale firms be separate.
The oblgazes have followed the letter of the law, but not its spirit.
“The law only stipulates that the same legal entity cannot be involved in both businesses,” says Oleksandr Paraschiy, an analyst at Concorde Capital.
Effectively, this allows the same business conglomerates to retain control over the system by forming a second company for sales. In some cases, these companies are offshores.
Back in the ‘90s
Since then, Ukraine has fallen off the energy sector reform wagon. With the arrival of Prime Minister Volodymyr Groysman’s government in 2016, Firtash’s gas firms encountered a potentially willing partner in the Cabinet of Ministers, Kharchenko says.
Groysman appointed Volodymyr Kistion as deputy prime minister for energy issues, and he brought former Regional Gas Company Regulatory Policy Director Myroslav Bodnar on as an advisor.
For years, Ukraine had forced its oblgaz companies to pay Naftogaz via specialized government-controlled accounts with automatic payment-upon-delivery. The policy was instituted after a period in the 1990s when distribution firms would fail to pay wholesale gas and energy providers for what they received, dumping huge debts on the government.
Groysman’s team did away with the regulation in April 2017, allowing oblgaz firms to once again delay payment to Naftogaz.
At the same time, the Cabinet of Ministers ordered Naftogaz to supply gas to the oblgazes as demanded at a price set by the government. The move served to decrease market competition and buttress Firtash’s monopoly.
Additionally, since the oblgazes and sales companies are now separate, Naftogaz has no idea how much people are paying for its gas.
The state-owned hydrocarbon firm is, however, aware of how much the oblgaz companies owe it. Oleksiy Khabatiuk, deputy head of Naftogaz’s energy efficiency department, estimated that his company has lost Hr 30 billion ($1.13 billion) to non-payment from the scheme.
“A situation has emerged where money comes, but no market participant other than the gas deliverers sees how much money the population is paying, so it’s impossible to proportionally control how much gas is given out,” says Khabatiuk.
Paraschiy says that this problem marks a return “to the situation of the mid-nineties,” with oblgazes again delaying payment.
Murky waters
Part of the problem stems from how Ukraine tabulates subsidies — the money does not go directly to impoverished citizens who need the cash, but rather to the oblgaz firms, which then supply gas at lower rates to designated consumers.
New legislation that went into effect at the start of 2018 mandates that oblgaz firms supply subsidized individuals with gas delivered from Naftogaz. At the same time, the new rules allow the oblgaz companies to skim 12.5 percent of gas payments for themselves, meaning that the firms can use money obtained from customers to pay companies other than Naftogaz.
Naftogaz says that the oblgaz firms abuse the system to pay other companies for gas that it delivered.
“According to the new rules, we are obligated to deliver gas, but the delivery-transmission companies can use money received for gas to perform transactions with other companies,” said Naftogaz CEO Andriy Kobolev in a statement. “This is not monetization, but the creation of an opportunity to siphon money from Naftogaz, and from the state budget of Ukraine.”
However, Kistion, the deputy prime minister responsible for the policy, disagrees with Kharchenko and Naftogaz that the issue is one of corruption. He sent the Kyiv Post a bevy of statistics, and said that oblgaz companies are no more or less in debt than the companies “controlled by Naftogaz.”
He blames the problem of debt on the population.
“Non-payers are those who do not receive subsidies and belong to the self-sufficient section of the population,” Kistion wrote in a statement. “If some are able to buy a yacht, but don’t pay for gas properly, then they should be held responsible.”
